Money Stuff

[Backpack234]

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Anyone here successfully do a Mega-Backdoor Roth? All my resources (WCI, investing books, etc.) mention that you need 2 things to do it: in-service transfers and post-tax contributions. Now my accountant friend is telling me I won't be able to because I'm part of a group plan through w-2 and some annual review wants to make sure high compensated individuals aren't benefiting more than anyone else.

Curious if y'all do this and if y'all have run into any problems?

 

[southerndoc]

Has nothing to do with it. If you have IRA assets in a traditional IRA, SEP-IRA, etc. you can convert to a Roth IRA no matter your income, W-2 status, etc. You will pay taxes on it though.

EDIT: Sorry, you were talking about a backdoor Roth. There is a pro-rata rule. You make non-deductible contributions and then convert a Roth without penalty. If you have any money in a traditional IRA, SEP, etc., then that is taxed. If you have a 401(k) or 403(b) that is excluded from the pro-rata rule.

 

[GonnaBeADoc2222]

He's talking about something different. I actually don't know the answer as I've never done the Mega Back Door. Check out White Coat Investor - lots of posters over there are very informed.

 

[southerndoc]

I completely missed the mega portion. Mega backdoor Roths are complicated to say the least. Probably best answered by someone in the forums at Bogleheads.org.

 

[Angry Birds]

 

[Backpack234]

Yep. Thanks for the help. I'll try over at Bogleheads or WCI forums. The mega backdoor Roth doesn't seem all that difficult, but I tend to trust licensed professionals over internet celebrities (sorry WCI). Turns out though that I got this idea from WCI and my accountant didn't know anything about it, so I figured someone here might have actual experience with it.

 

[Jabbed]

What's the benefit of this exactly? Won't your effective tax rate be higher now than in retirement?

 

[Backpack234]

What's the benefit of this exactly? Won't your effective tax rate be higher now than in retirement?

I think the simplest explanation is that you get the same benefit as a Roth IRA.

But a little more in detail:

There are two main types of tax benefits with retirement accounts. Pre tax (I'm not taxed when I put the money in) and post tax (I'm not taxed when I take the money out). An additional benefit is that money in a retirement account isn't subject to capital gains tax, only regular income tax.

So let's say you have 100k to put into savings and 0 debt (just for an example):
3500 into HSA (pre-tax)
18,500 into 401k (pre-tax)
Employer 401k match (free money)
5500 into Backdoor Roth IRA (post-tax)
Total: 27,500. Remaining: 72500

You've still got 72500 to put somewhere, but you're out of pre-tax accounts. That's where the Mega Backdoor Roth comes in. You can still get the post tax benefits of a Roth and no capital gains if you do the Mega Backdoor. Compare that to a non-tax-advantaged account (i.e. stocks, bonds, real estate, etc.) and that's the benefit.

*note I am not an accountant*

 

[Birdstrike]

"Mega-Backdoor Roth." Hmm...

I knew about the back door roth, but "Mega," I'd like to know more about. If only I could be disciplined enough to have that much cash left over after bills, 529s, 401k's, matches, HSAs, back door roths (still working on this one) and generally trying to live a little. Maybe someday, though...

 

[Psai]

"Mega-Backdoor Roth." Hmm...

I knew about the back door roth, but "Mega," I'd like to know more about. If only I could be disciplined enough to have that much cash left over after bills, 529s, 401k's, matches, HSAs, back door roths (still working on this one) and generally trying to live a little. Maybe someday, though...

The Mega Backdoor Roth IRA Practice Retirement Plan | The White Coat Investor - Investing And Personal Finance for Doctors

for when you get that self discipline

 

[hundreddaysoff]

My understanding is that, like the WCI post says, you can't do this if you're W-2 and part of a group plan.

Mad Fientist tends to get into the weeds of this stuff a bit more than WCI. Even if you could do this, you're still affected by the $55K total cap on both tax-deferred and Roth contributions, so after your 401(k) employEE contribution and employER match, even in theory you could only contribute ~$20K of your extra $72K:

Mega Backdoor Roth | Mad Fientist

And if you'll be in a lower tax bracket when you retire vs now like most doctors, Mad Fientist has also shown that pretax savings is probably a better deal vs Roth:

How to Access Retirement Funds Early | Mad Fientist

(Article is only semi-relevant but search for "here's a graph" for the money shot.)

Is a 1099 moonlighting gig an option for you? Would allow you to fill out the rest of that $55K pretax space into your own private 401(k). Alternatively, if your job offers a 457(b) that could work too.

 

[doctalaughs]

My understanding is that, like the WCI post says, you can't do this if you're W-2 and part of a group plan.

Mad Fientist tends to get into the weeds of this stuff a bit more than WCI. Even if you could do this, you're still affected by the $55K total cap on both tax-deferred and Roth contributions, so after your 401(k) employEE contribution and employER match, even in theory you could only contribute ~$20K of your extra $72K:

Mega Backdoor Roth | Mad Fientist

And if you'll be in a lower tax bracket when you retire vs now like most doctors, Mad Fientist has also shown that pretax savings is probably a better deal vs Roth:

How to Access Retirement Funds Early | Mad Fientist

(Article is only semi-relevant but search for "here's a graph" for the money shot.)

Is a 1099 moonlighting gig an option for you? Would allow you to fill out the rest of that $55K pretax space into your own private 401(k). Alternatively, if your job offers a 457(b) that could work too.

Incorrect - mega backdoor roth makes the MOST sense and definitely IS possible for w2 (as long as your plan allows after tax contributions and in-service withdrawals - which more and more do).

When I used to be w2 I did this many times. You do need to pay attention to the pro-rata rule and move any rollover iras back into the 401k. There are tons of accountants that have NO idea how this works though. Find one that does a lot of physician and executive (ie high income) returns and bring a few articles on the mega backdoor Roth. If you find the right accountant that does these they will immediately know what you are talking about. If they have to reasearch it it’s a bad sign. There are plently of articles on this now (many more than when I was doing it as it’s gaining popularity). I believe ther was even one in wsj and one in morningstar.